Recorded on July 15, 2025, this panel discussion features Joshua S. Bauchner, Chair of Mandelbaum Barrett PC’s Cannabis, Hemp, and Psychedelics Practice Group, Martin D. Hauptman, Partner in the Firm’s Trusts & Estates and Taxation Groups, and Darren Gleeman, Managing Partner of MBO Ventures. The trio explores how Employee Stock Ownership Plans (ESOPs) can provide cannabis companies a powerful tool to mitigate the crushing effects of IRS §280E. Martin, an attorney and CPA with extensive ERISA experience, lays out the technical and regulatory foundations, while Darren, who has structured every closed cannabis ESOP in the United States, explains how these plans function as an alternative way for owners to sell their companies while unlocking significant tax advantages. Josh contextualizes the discussion, connecting the legal and business strategy elements and highlighting how these structures can make 280E irrelevant for operators.
At its core, an ESOP enables a business owner to sell the company to its employees through a trust even though the employees themselves invest no money. Joshua emphasizes that the federal government designed ESOPs to encourage broader employee ownership and provides substantial tax incentives as a result. When structured correctly as an S-corporation ESOP, the company becomes entirely exempt from federal and state income taxes. Because the entity owes no income tax, §280E, which otherwise disallows ordinary business deductions for cannabis businesses, becomes irrelevant. Josh and Darren note that while ordinary operating expenses still cannot be deducted, the ESOP structure shifts profits to the tax-exempt trust, eliminating income tax liability. For companies organized as LLCs, Josh adds, converting to a corporation and electing S-corporation status is straightforward under most state statutes.
The panel also highlights significant advantages for owners. Josh explains that when selling to an ESOP, owners can defer capital gains tax under Internal Revenue Code §1042 by reinvesting proceeds into U.S.-based securities. Darren compares this to a real-estate 1031 exchange but for business assets. If the replacement investments are held until death, heirs benefit from a full step-up in basis, eliminating the capital gains tax. Josh underscores that the sale is typically financed through a combination of bank lending and a seller note, which closely resembles a private-equity leveraged buyout but offers better tax treatment and no financial burden on employees.
Practical scenarios were also addressed. If the company grows and is later acquired, perhaps by a multi-state operator after federal legalization, Joshua explains that the ESOP is terminated, employees vest immediately, and proceeds are distributed to participants, often resulting in substantial retirement benefits. Conversely, if the company fails, the ESOP functions like any equity arrangement, meaning employees owe nothing and do not receive residual value. The discussion also covers employee vesting schedules and allocation methods, emphasizing how ESOPs can dramatically improve retention by giving employees a tangible stake in the business.
Overall, the panel demonstrates that while ESOPs are complex, they provide a government-supported strategy for cannabis operators to eliminate tax drag, monetize their businesses efficiently, and share long-term value with employees.
Watch the full recorded webinar here to see the panel walk through examples, financing structures, and step-by-step ESOP implementation for cannabis businesses.